Profit in Sharing

Even free file-sharing of music has a potential upside for
marketers in search of consumer data.

Karen Ohlrich isn't your typical Fatboy Slim fan. Until
recently, this 39-year-old account representative for a Web
development firm in Cleveland couldn't tell the difference between
Fatboy Slim and The Chemical Brothers. But one day last September,
she visited the Napster Web site, and downloaded "Rockafeller
Skank," off Fatboy's album, "You've Come A Long Way, Baby." The
sample was enough to get her hooked. So hooked, in fact, that she
clicked over to Amazon.com and ordered the CD.

Shared-music sites, such as Napster, have exposed Ohlrich to
musical styles she didn't even know she liked. And this "informed
consumerism," has translated into some unexpected sales, Ohlrich
says - such as the Appalachian dulcimer CD she ordered this past
October. In fact, Ohlrich is so enamored with the idea of sampling
music online that she'd even "pay some type of fee," she says.
"Radio is limited in what it promotes and plays. These file-sharing
applications are as good as it gets. I listen to new music, get out
my credit card, and buy a CD I know I'll like. What's better than
that?"

Not much, if you're a music executive. Forget copyright worries,
the advent of digitally downloadable music is creating powerful new
opportunities for music marketers. Recent studies show that music
aficionados who feed their "music jones" through file-sharing
services actually make more music purchases. And keeping track of
just who these online samplers are, is getting easier as well - as
digitization makes data collection even more efficient for music
marketers.

Although there's a "very complicated relationship between
emerging technologies, copyright infringement, and traditional
marketing," music execs shouldn't despair, says Mark Fusco of
Connecticut-based research firm Greenfield Online. According to a
recent study by Greenfield and YouthStream Media Networks, nearly
75 percent of college students have downloaded music from the
Internet; 58 percent of those students have used Napster. Those
numbers are enough to make Metallica burst a guitar string. But
consider this: nearly two-thirds of the 1,135 college students
surveyed, download music from the Internet as a way to sample tunes
before opening their wallets. "That's music to a marketer," says
Fusco.

In fact, the proliferation of music online is introducing
consumers to artists they may have missed during their drive time.
A survey by Yankelovich Partners for the Digital Media Association,
found that about half of the music fans in the United States turn
to the Internet to search for artists they don't hear on local
radio stations. Nearly two-thirds of those who downloaded music
from the Web say that the search ended in a music purchase. Even
dreaded Napster users are proving to be good customers. Jupiter
Research discovered that 45 percent of online music fans are more
likely to have increased the amount of music they purchase, than
online music fans who do not use Napster.

According to rock artist personal manager David Spero, "Napster
is just a kind of high-tech cassette recorder." And just like the
venerable cassette recorder, it's technology that can only help
musicians pick up new fans. Spero says that artists such as David
Bowie, for example, would never have broken into smaller markets if
kids hadn't recorded tunes off the radio and passed those
recordings on to their friends. (Spero worked with Bowie in the
1970s.) "What we always hoped was that the kid down the street
would share some breaking artist with a friend," explains Spero.
"That's not a very efficient way to market. Now, with a more
streamlined ability to drill down and take a look at your potential
audience, new artists and those people responsible for marketing
new artists, might actually be able to cobble together a real
plan."

Spero says that although most music marketers understand the
demographics of core audiences for particular musical styles, it's
the "fringe" elements, the unexpected buyers, as well as promotions
and concert touring that can make a real difference for artists and
execs. "Who would think that some 49-year-old guy is listening to
the Wallflowers," says Spero, as he pops the group's latest
offering into his CD player. "Marketers will now know more about
the wild cards ... people like me."

In fact, these wild cards could be welcome relief for all types
of marketers. Those who buy tunes over the Web are more likely to
buy other products online, according to Cyber Dialogue. People who
use the Web to get their music also have deeper pockets than their
average online counterparts, spending up to $100 more per year by
e-commerce. On average, adults online spent $509 by modem in the
past 12 months, while the average music user spent $610 online.
Plus, those who download music are apt to have a variety of
enabling software programs such as Real Audio, Shockwave, or MP3 on
their PCs. This allows them access to a broad range of
entertainment content, not just music. "This points to clear
customer retention and partnership opportunities for providers of
online entertainment," explains Peter Clemente, vice president of
Cyber Dialogue.

But it just drives artists and record labels crazy to think
about all of those consumers bopping to their tunes for free. And
although they'd like to put an end to all of that by placing a toll
on the downloading highway, pay-per-song is not likely to be the
business model of the future. In the Jupiter study of Napster
users, 71 percent of those who use the music site said that they
were willing to pay to download an entire album. But in a
Greenfield Online survey of 5,200 online music shoppers, nearly 70
percent say that they have not paid - and will not pay - for
digital music downloads. That's why Jupiter projects that revenue
from digital distribution will only reach $147 million by 2003,
accounting for less than 6 percent of online music sales, while the
sales figures for actual CDs online is projected to exceed $2.6
billion by 2003.

So what does lie ahead for the music industry? Although the new
killer application has yet to be discovered, subscription-based
services are definitely on the horizon, and may be more viable than
a per-song fee scheme, says Steve Forti, director of the research
division of Yankelovich Digital Media. "If there was a service that
charged $10 or $20 a month, that would give access to anything
they'd want, that would be something the consumer would think is
reasonable," he says.

In fact, change is already underway. Late last year, Bertelsmann
AG and Napster announced a strategic alliance to further develop
the Napster person-to-person file-sharing service. The business
model seems like a winner for both the Napster community and the
music industry. With the new, secure, membership-based service, the
"Napster experience" is preserved: members will still be able to
share music files. But at the same time, the model provides
payments to those who hold the rights, including recording artists,
songwriters, recording companies, and music publishers.

Yet, even with such models, the end result is that the
entertainment industry has to become savvy about partnerships,
gathering and using consumer data, and working free digital
downloads into their business plans. Willie Walker, president of
Wizer Home Systems, an Austin, Texas-based home networking company,
believes that entertainment and leisure are "hot buttons" with
clients who want to make their castles 21st century friendly.
"Music of the past will continually be pirated until the
entertainment industry wakes up and realizes the digital world is
all about bits," says Walker. "MP3, streaming audio, streaming
video, audio books, TV-on-demand, and IP telephony (phone service
over the Internet), are all just bits waiting to be
transferred."

In other words, there is no real difference between music,
movies, magazines, and television, and in the face of the
continuing trend of media mergers, new partnerships that mine data
and deliver these bits to consumers in innovative ways will make
money - whether it's through royalties, sponsorship deals, or ad
revenue. There will be more than a catchy beat carried on
tomorrow's airwaves to music consumers - the only question is how
to make the most money while the musicians make consumers
dance.